Cannabis Industry Growth and Trends - 2018 Q2

Twenty-nine states and Washington, D.C. have legalized cannabis in some form. Eight states have legalized adult use/recreational use. Polls indicate that over 80% of Americans approve of legal access to medical cannabis and approximately 60% of Americans approve of full adult use legalization. Approximately 200 Million people live in states with legal cannabis of some form. The 2016 Legal Cannabis Market in the US was approximately $6.58 Billion (Medical is $4.7 Billion; and Adult/Recreational is $1.9 Billion). By 2025, the legal cannabis market in the US is projected to be approximately $24 Billion (13.2 Billion Medical and 10.9 Billion Adult Use/Recreational).6 2018-2020 are still the rapid grow years before the growth rate is expected to slow as the industry continues to mature. The charts below depict the expected trends:

As far as product trends go, you can see that flower is still the biggest seller at around 50% of the market in the 4 states shown below. As the markets mature, you see a shift away from flower products and into to the other major categories like edibles and concentrates. This is beneficial for companies operating in the market as they can sell higher margin products and for consumers as it encourages new entrants, product development, and lower prices. These developments occur due to new adult-use markets having their demand driven mostly by existing users, who are used to consuming flower only. As the markets mature, so do the tastes of consumers and products like vape pens and edibles are the go-to for new or inexperienced users. The second chart below shows how the various US adult-use markets have shifted between products on a quarterly basis.

According to Forbes, the global legal cannabis market could reach USD $31.4 Billion by 2021. The U.S. currently contributes to 90% of the global market sales but is projected to drop to around 57% by 2021. This is largely due to Canada’s recent nationwide legalization. Further contributing to this are countries in Latin America and Europe that are legalizing cannabis in some form for medical purposes.
Below is a chart that looks at a breakdown of capital raises in the sector from 2016 to 2017. As you can see, deals in most sub-sectors saw growth with the most significant being in cultivation and retail. The strong deal flow in cultivation and retail has continued in 2018, and our recent investments have reflected these capital trends.

Highlights from the Cannabis Industry and Politics - 2018 Q2

In June, we witnessed the first major country in the world to legalize recreational cannabis in Canada (Uruguay had proceeded Canada). There were many political advancements for cannabis in the US this quarter. More and more members of Congress are coming out in support of marijuana and the various bills trying to weave their way through the hurdles of US politics. As of right now it appears that cannabis will be a hot issue come the November elections. Outside of North America, the push continues to see legal medicinal markets open up, and more and more companies are entering the space of using cannabis to create a specific product or a cure to a specific problem.

Political Highlights

The US senate passed the Farm Bill which had provisions in it for legalizing and regulating the cultivation and sale of industrial hemp. This is big news for a hemp industry that has been waiting for permission to take off. This distinction is also important because the government now looks at hemp and cannabis plants as two different things.

A new survey released this quarter shows that 67% of Americans are in favor of ending the prohibition of cannabis. This shows bipartisan support of cannabis with around 57% of conservatives for legalizing pot. This statistic will have importance come the November elections, as the next push for state legalizations come and hopefully some of the bills managing to get passed in the US congress. Examples would be increased access to banking and allowing for operational expenses to be deductible by canna-businesses.

The UN drug committee issued a review of the health and safety of cannabis to the World Health Organization for review. The key takeaway from the findings was that cannabis is a relatively safe drug that millions use to treat a number of conditions. The WHO will use this review to sculpt recommendations for the level of international control needed for the plant.

The STATES Act , one of the more popular bills in Congress for cannabis right now, would exempt states that have elected to legalize cannabis from the Controlled Substances act provisions for marijuana. This means they would have access to banking and wouldn’t fear of federal prosecution. It does not go so far as to legalize cannabis at the federal level. This would be a way to allow the industry to move forward without the federal government seemingly condoning cannabis use. We don’t anticipate that this bill will go far this year, but as the Presidential elections in 2020 get closer, the prospects for this bill grow in our opinion. Our view is that President Trump doesn’t want this to be a campaign issue that the Democrats would own. He can take it out of the campaign by simply saying he endorses the states’ rights. In fact, he has already alluded to this potential endorsement.

In May, President Trump was supposed to sign a bill to rollback key portions of the Dodd-Frank Act , passed in 2010 in response to the financial crisis. In this bill were key provisions that protect banks from federal regulators for working with cannabis-related legitimate businesses. However, the provision was removed from the bill before it could be signed. They are hoping to get it back into the funding bill for 2019.

The states of New Jersey and New York have announced that they will stop prosecuting marijuana cases starting this summer. Both states seem to be heading towards some form of full legalization but in the meantime, it is important for them to recognize the disproportionate effect that the war on drugs has had on many of their citizens. A trend we are seeing more and more in US states.

Recreational Industry Highlights

In this quarter, the Canadian congress officially approved the Cannabis Act, which legalizes cannabis for cultivation and sale to the adult-use/recreational market. October 17th will be the first official day for the industry in what amounts to a slight delay from the July rollout they hoped for. Still it was important that the bill passed as it marks the first major country to have a legal adult-use industry.

Canadian Provinces continue to lock in supply agreements with various LPs across the country. At this point, the companies without supply agreements have seen a decent drop in their stock prices, although plenty of opportunity is still out there.

Massachusetts awarded its first recreational cannabis license this quarter and there are many more where that came from. They were looking to roll the industry out on July 1st but there have been slight delays.

A new study showed that traffic fatalities have dropped 10% in the first 11 months since Nevada legalized their adult-use market. The goes against the claim that adult-use legalization increases car accidents and is therefore bad for public safety. It is important to note, however, that increases in traffic fatalities in a state may not be related to marijuana laws, which means the same must be said for decreases.

A major trend that we are seeing emerge in both the medical and recreational markets is a desire from consumers for smokeless products. This stems from the desire to be healthier and more socially conscious but also from the fact that there are reliable, differentiated products readily available. One major advantage that recreational markets have over the black market is that these products are available and have been tested and are produced in licensed facilities.

We recently saw the first company, Tilray, to go public on a major US stock exchange, Nasdaq, that engages in the cultivation and sale of cannabis in Canada and internationally. This IPO has been very successful so far and will likely lead the way for more companies, opening the door to investors.

Medical Industry Highlights

This part of our report will cover the medical findings as well as financial results of the medical marijuana industry in the third quarter.

In Arizona, a judge convicted a man for possession of cannabis concentrates, which are still considered illegal, despite the growing medical cannabis market in the state. This was bad news for any companies operating in the state and is an example of how much regulatory aspects of this industry can affect investments.

Switzerland has announced that they are going to begin looking at relaxing their medical cannabis laws and are creating a pilot program to try and figure out the best way for allowing greater access. This is good news for Europe as they have yet to establish a major market outside of Germany.

Oklahoma voters have approved a ballot measure that legalizes medical marijuana in the state. This comes in a red state during a primary which usually see lower and more conservative voter turnout. The most interesting thing about the measure so far is that it does not list any qualifying conditions to be eligible for medical cannabis. It is solely up to the discretion of the doctor to recommend cannabis for any ailment he/she sees fit. This is very good for their industry potential as the more possible conditions it can be used for, the more the medical cannabis industry will be adopted by the population.

On June 25th, the FDA officially approved the first ever cannabis plant-derived medicine referred
to as Epidiolex. GW Pharmaceuticals has set the course for getting a cannabis derived medicine approved by the FDA. With this approval, it will be on the DEA to officially re-classify CBD. This is the non-psychoactive part of the cannabis plant that is credited for the therapeutic effect of the plant, unlike THC which is credited for the “high” experienced. With the re-scheduling of CBD, many more companies will be able to use it in research etc.

CBD in general is becoming popular with consumers and therefore companies. With the changes in regulations in the past year, it is now possible for many companies to make products with CBD that can be sold anywhere in the US. Just recently, a 7-11 distributor made a deal to sell CBD products in over 4,500 7-11 store locations in states with legal recreational or medical cannabis laws. These include D.C. and potentially Maryland as well.